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Your Investment Portfolio: Five Reasons for Concern
By: Bob DiMeo, Managing Partner
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| It’s summertime, we’re in the midst of the longest economic expansion in U.S. history and stocks are within range of record highs. Some suggest that investors should be feeling pretty good right now. But you don’t and it might be difficult to pinpoint why.
Here are five developments that may be cause of your uneasiness, followed by practical recommendations for what to consider doing right now regarding your portfolio.
Why investors might have that uneasy feeling
Reason #1: U.S. stocks dramatically outperformed, but how long can it last?
Your portfolio likely has a sensible allocation to U.S. stocks but considering dramatic outperformance over the recent past, you wish you owned even more. Still, sensible investors have at least some concern over the length of this bull market and just how meaningfully a pullback would impact returns.
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| Reason #2: Bonds and interest rates look rather wonky
Many factors in today’s bond and interest rate markets seem curious, but the following two stand out in perplexing investors:
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| B) Risky Bonds in Demand: It wasn’t that long ago that investors shunned bonds issued by Greece and Italy. Buyers now appear exuberant as illustrated by recent government debt auctions1. Cravings for yield recently led to an auction of Greek seven-year notes being oversubscribed fourfold. More proof of a potentially harmful appetite for risky bonds comes from investors pumping $11 billion into high-yield muni bond funds through mid-year, the biggest inflows in nearly 30 years according to Refinitiv2. That’s tremendous demand for bonds that some deemed taboo just a short time ago.
Reason #3: CFOs are leaving
While unproven as an indicator for future stock returns, it is concerning that finance chiefs are retiring at the fastest pace seen in more than a decade. Sure some are simply reaching retirement age and others are the “odd accountant out” after a merger. But as Duke University’s Campbell Harvey said in a recent Wall Street Journal article: “It’s an intriguing market timing signal by people that are well able to assess the pulse and direction of the U.S. economy. These executives are sitting on a pile of stock and it’s difficult to sell that stock as an insider, so when do you want to retire? Do you want to retire when the stock market is near an all-time high, or do you want to retire in the depths of the inevitable correction that might be a recession?”3
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| Reason #4: Trade wars impacting global growth… and currency battles aren’t helping
Investors expected trade wars to impact the U.S. and China but recent data show evidence of collateral damage. Europe has been affected and recently responded with fiscal stimulus. The World Bank expects global growth to slow to just 2.6 percent this year and their Global Outlook Report states that “risks are firmly on the downside, in part reflecting the possibility of a further escalation of trade tensions.” Read more here.
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| Reason #5: Investors forgot that medicine (stimulus) is used when something is wrong.
It’s a bit strange that investors enthusiastically embrace any talk of lower interest rates or other stimulus, seemingly forgetting that like medicine, stimulus is introduced to cure a condition. I understand why anything that jolts the economy might feel good, but have investors overlooked a slowing economy or some other ailment that required the need for stimulus in the first place?
What’s an investor to do?
Though I identified five reasons for concern, in reality there are many more. However, there are also numerous positives to consider including historically low unemployment and interest rates, the fact that the stocks often perform well heading into election years, amazingly robust earnings for tech companies, strong consumer spending and more. But if you’ve read to this point you’re seeking actionable recommendations that might help you better manage your portfolio… here they are:
• Know that it’s not a matter of if but rather when the next market decline and economic recession will occur.
• An abundance of research suggests that market timing, including attempting to sell at the top and repurchase after a pullback, is a losing proposition.
• Can you think of a time when clarifying your risk and return objectives was more important than now?
• Can you think of a time when broad, thoughtful diversification was more important than now?
• Adopt the 20 percent haircut approach to your portfolio. You can learn more here.
• For our latest thinking on asset class valuations and more, check out DiMeo Schneider’s Mid-Year Update here.
Given the length of this economic expansion and lofty returns for stocks, investors could be feeling good – but it’s understandable that most feel a bit uneasy. None of us will precisely predict the next downturn and stocks may forge ahead for some time. The prudent approach would be to, in almost clinical fashion, examine your investment strategy and ensure it aligns with your specific objectives and goals.
As always, please feel free to contact me or any of the professionals at DiMeo Schneider & Associates L.L.C. for assistance.
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| 1Wall Street Journal – July 17,2019
2Wall Street Journal – July 24, 2019
3Wall Street Journal – July 17,2019
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| This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate.Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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